In Media : June 2010

Will the regulatory Bill work?
Business Standard, June 09, 2010

The draft Bill seeks to empower regulators while making them accountable to legislature. But politicians won’t give up power so easily and getting MPs/MLAs to oversee the regulators’ work will be even tougher

Pradeep S Mehta
Secretary General, CUTS International

The draft Bill proposes multi-sector regulators reporting to Parliament for sectors that come under different ministries — this will ensure regulatory accountability

Infrastructure is the key to economic growth, job creation and poverty eradication. Much has already been said on the huge financial requirements associated with the creation of quality and adequate infrastructure with an active participation of the private sector along with the public sector. Such requirements can be met smoothly and consumer welfare can be ensured only if we have a sound, independent and predictable regulatory framework. Independent regulation, however, is not a new thing in the country. We have been experimenting with different approaches across various sectors for its facilitation, but have failed to arrive at a good solution.

In order to bring in harmony in regulatory approaches, the Planning Commission, which oversees the subject of infrastructure in our country, has wisely designed a framework law which will require any branch of the government to adopt some basic, sound principles while drafting a regulatory law for the sector it administers.

One of the critical objectives of the draft Bill is the promotion of independence and autonomy of the regulator, so that regulatory implementation is not adversely affected by ministerial discretion concerning the demands emerging from political arbitrage. Towards that end, it has been proposed that sectoral licensing issues should also be handled by the regulator. And all its decisions will be subject to appeals at a special appellate tribunal.

The second major medium through which the draft Bill proposes to promote independence is establishment of a multi-sector regulator for cognate sectors such as electricity, petroleum, gas, coal, etc, clubbed under the rubric of “energy”. Since each of these sectors is under a different ministry, it’s difficult for one ministry to be in a dominant position — this will also result in efficient use of available resources (funding, personnel, etc). Such diversity in coverage by a single regulator would necessitate that it reports directly to Parliament rather than to the ministry concerned. Assuming that the possibility of single-sector regulators such as that for sea ports exists, the Bill also spells out in detail the scope and procedure for the issue of policy directives by the line ministry. The current drafting of various regulatory and competition laws gives enough latitude to a babu or a minister to get away with murder when issuing a policy directive.

Third, the process of the selection of chairmen and members of the regulatory agency and their tenure, age-limit, etc vary from sector to sector. Not only has each ministry evolved its own approach to designing and manning the regulator, it is often inconsistent with sound science. The draft Bill proposes setting up of a standing selection committee headed by the Cabinet secretary — this, however, is not acceptable to many. This fact came out vividly in a recent seminar organised by CUTS (Consumer Unity & Trust Society) International in Delhi, where Planning Commission Deputy Chairman Montek Singh Ahluwalia advocated that anyone associated with a particular ministry should not be able to join the regulator established by that ministry. However, he did not mind the fact that all the regulators were manned by super-annuated people. The mood of the house did not second his stance as the general consensus was that the selection process should be de-bureaucratised with non-government experts also sitting on the selection committee. More importantly, many people, including E M S Natchiappan, a ruling party MP, felt that sinecures needed to be stopped.

Fourth, the Bill has proposed that all competition issues should be handled by the sector regulator rather than the competition authority. The majority opinion was that behavioural issues of a regulated sector should be covered by the competition authority, while structural issues should be handled by the sector regulator. For best solutions, both the regulators should also consult each other as a mandatory drill.

The choice between a policy statement and an overarching law for achieving uniformity in regulatory architecture was also debated, but the majority opinion was that a soft law is persuasive, but not compelling. One speaker in favour of this, S L Rao, former chairman of the Central Electricity Regulatory Commission, has also argued the case in “Making regulators work” (Business Standard, June 5).

Sceptics questioning the need for the overarching law would mouth the adage, “Don’t fix it, if it ain’t broke”. But, if we can anticipate the future scenario, then won’t “a stitch in time save nine”?

Navroz K Dubash
Senior Fellow, Centre for Policy Research

The draft Bill doesn’t really ensure public accountability — elected representatives ask almost no questions on the reports tabled by the regulators before state legislatures

Given the proliferation of regulators, the case for a regulatory reform Bill that standardises regulation appears watertight. Why would anyone want divergent regulatory approaches across sectors?

Regulatory harmonisation would have made sense if we understood well the role of economic regulation in India’s economy, and if we had a consistent track record of well-functioning regulators. Instead, there is confusion about just how “independent” an independent regulator can or even should be; and there is also a widely divergent track record. The Bill does not seem to be based on an adequate analysis and diagnosis of the current situation.

Regulatory agencies were intended as a way of de-politicising decision-making, hence the stress on independent regulatory agencies. But simply declaring regulators independent has been a weak guarantor of independence. For example, state electricity regulators have been frequently undercut by state governments, which have simply issued contrary directives to state-owned electricity boards. In this battle, regulators are further hamstrung by extremely weak staff capacity. Yet there is no sustained effort to remedy the capacity shortfall.

To understand these patterns, it is useful to go back to first principles. What explains the eagerness of a ministry to voluntarily delegate a portion of its powers to an agency formally outside its control? The standard answer is that doing so allows it to signal credible commitment — binding its hands to a policy approach despite the risks of political unpopularity. In practice, the delegation is partial; the ability to rollback or stem unpopular tariff hikes, or appease powerful corporations, is never fully relinquished. The regulator often becomes one more useful shell in an ongoing game of plausible deniability and shifting responsibility for decisions.

This suggests full independence of regulators is eminently desirable; the obstacle is political feasibility. But there is a deeper question: Should regulators be independent of the executive, and under what conditions? There are at least two.

First, since regulators are unelected, the paradoxical answer is: Regulators should be independent of the executive when they are plausibly and adequately accountable to someone else. The regulatory reform Bill somewhat blithely encourages accountability to the legislature, but legislative oversight of regulators is typically weak. A Prayas Energy Group survey of electricity regulators found that few regulators produce annual reports, and when they do table these before state legislatures, elected representatives ask almost no questions. Direct accountability to the public is an important complement to legislative accountability. But this would require adequate civil society capacity, supplemented by robust procedural safeguards, such as a culture of openness, mandatory public hearings and a requirement for reasoned orders. The draft Bill is noticeably weak in this area.

Second, in addition to viable accountability, regulators can only be effective if they are given clear mandates and not tasked with making politically charged trade-offs. Giving a regulator a clear mandate, however, makes it less useful to a parent ministry as part of a political shell game. Sending clear signals upfront risks alienating one or another political constituency; it is more expedient to keep things vague.

The regulatory reform Bill is not founded on engagement with these structural issues that plague regulation in India. Instead, it is focused on institutional design issues, such as getting the right people into regulatory jobs. This is important, no doubt. But without addressing the underlying tensions described here, it is an effort to rely on exceptional individuals to transcend a flawed system. Indeed, our regulatory system is full of competent people who struggle to fix problems that are above their pay grade.

The discussion above may suggest I think regulatory agencies are a bad idea. I don’t. Many sectoral regulators have achieved positive results, often against the odds. The gains in terms of openness and transparency of decision making, often complemented by close civil society scrutiny, are a substantially positive outcome. But to take the model forward requires grappling with the realities of regulation in practice, acknowledging it is as much the art of politics as it is science. We must design for regulation that deepens forms of regulatory accountability; that transcends incentives to provide weak and inconsistent guidance to regulators; and that addresses persistent weaknesses in capacity. The regulatory reform Bill fails to grapple adequately with these challenges.

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